Question

As companies evolve, certain factors can drive sudden growth. This may lead to a period of...

As companies evolve, certain factors can drive sudden growth. This may lead to a period of nonconstant, or variable, growth. This would cause the expected growth rate to increase or decrease, thereby affecting the valuation model. For companies in such situations, you would refer to the variable, or nonconstant, growth model for the valuation of the company’s stock.

Consider the case of Portman Industries:

Portman Industries just paid a dividend of $1.92 per share. The company expects the coming year to be very profitable, and its dividend is expected to grow by 16.00% over the next year. After the next year, though, Portman’s dividend is expected to grow at a constant rate of 3.20% per year. (Note: Do not round your intermediate calculations.)

Term

Value

Dividends one year from now (D1) _____ (Note: Rounded to four decimal places)
Horizon value (Pˆ1) ______ (Note: Rounded to two decimal places)
Intrinsic value of Portman’s stock ______ (Note: Rounded to two decimal places)

The risk-free rate (rRF) is 4.00%, the market risk premium (RPM) is 4.80%, and Portman’s beta is 2.00.

Assuming that the market is in equilibrium, use the information just given to complete the table.

What is the expected dividend yield for Portman’s stock today?

11.45%

10.40%

10.08%

8.32%

Now let’s apply the results of your calculations to the following situation:

Portman has 1,000,000 shares outstanding, and Judy Davis, an investor, holds 15,000 shares at the current price (computed above). Suppose Portman is considering issuing 125,000 new shares at a price of $18.20 per share. If the new shares are sold to outside investors, by how much will Judy’s investment in Portman Industries be diluted on a per-share basis?

$0.76 per share

$0.44 per share

$0.31 per share

$0.36 per share

Thus, Judy’s investment will be diluted, and Judy will experience a total Loss/profit of   ._______?

Homework Answers

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
As companies evolve, certain factors can drive sudden growth. This may lead to a period of...
As companies evolve, certain factors can drive sudden growth. This may lead to a period of nonconstant, or variable, growth. This would cause the expected growth rate to increase or decrease, thereby affecting the valuation model. For companies in such situations, you would refer to the variable, or nonconstant, growth model for the valuation of the company’s stock. Consider the case of Portman Industries: Portman Industries just paid a dividend of $1.44 per share. The company expects the coming year...
As companies evolve, certain factors can drive sudden growth. This may lead to a period of...
As companies evolve, certain factors can drive sudden growth. This may lead to a period of nonconstant, or variable, growth. This would cause the expected growth rate to increase or decrease, thereby affecting the valuation model. For companies in such situations, you would refer to the variable, or nonconstant, growth model for the valuation of the company’s stock. Consider the case of Portman Industries: Portman Industries just paid a dividend of $1.92 per share. The company expects the coming year...
8. Nonconstant growth stock As companies evolve, certain factors can drive sudden growth. This may lead...
8. Nonconstant growth stock As companies evolve, certain factors can drive sudden growth. This may lead to a period of nonconstant, or variable, growth. This would cause the expected growth rate to increase or decrease, thereby affecting the valuation model. For companies in such situations, you would refer to the variable, or nonconstant, growth model for the valuation of the company’s stock. Consider the case of Portman Industries: Portman Industries just paid a dividend of $3.12 per share. The company...
Quantitative Problem 1: Hubbard Industries just paid a common dividend, D0, of $1.00. It expects to...
Quantitative Problem 1: Hubbard Industries just paid a common dividend, D0, of $1.00. It expects to grow at a constant rate of 3% per year. If investors require a 10% return on equity, what is the current price of Hubbard's common stock? Do not round intermediate calculations. Round your answer to the nearest cent. $   per share Zero Growth Stocks: The constant growth model is sufficiently general to handle the case of a zero growth stock, where the dividend is expected...
(7-2) Constant Growth Valuation Boehm Incorporated is expected to pay a $1.50 per share dividend at...
(7-2) Constant Growth Valuation Boehm Incorporated is expected to pay a $1.50 per share dividend at the end of this year (i.e., D1=$1.50D1=$1.50). The dividend is expected to grow at a constant rate of 6% a year. The required rate of return on the stock, rsrs, is 13%. What is the estimated value per share of Boehm’s stock? (7-4) Preferred Stock Valuation Nick’s Enchiladas Incorporated has preferred stock outstanding that pays a dividend of $5 at the end of each...
(7-2) Constant Growth Valuation Boehm Incorporated is expected to pay a $1.50 per share dividend at...
(7-2) Constant Growth Valuation Boehm Incorporated is expected to pay a $1.50 per share dividend at the end of this year (i.e., D1=$1.50D1=$1.50). The dividend is expected to grow at a constant rate of 6% a year. The required rate of return on the stock, rsrs, is 13%. What is the estimated value per share of Boehm’s stock? (7-4) Preferred Stock Valuation Nick’s Enchiladas Incorporated has preferred stock outstanding that pays a dividend of $5 at the end of each...
Quantitative Problem 1: Hubbard Industries just paid a common dividend, D0, of $1.30. It expects to...
Quantitative Problem 1: Hubbard Industries just paid a common dividend, D0, of $1.30. It expects to grow at a constant rate of 4% per year. If investors require a 10% return on equity, what is the current price of Hubbard's common stock? Round your answer to the nearest cent. Do not round intermediate calculations. $ per share Zero Growth Stocks: The constant growth model is sufficiently general to handle the case of a zero growth stock, where the dividend is...
Nonconstant Growth Stock Valuation Assume that the average firm in your company's industry is expected to...
Nonconstant Growth Stock Valuation Assume that the average firm in your company's industry is expected to grow at a constant rate of 4% and that its dividend yield is 8%. Your company is about as risky as the average firm in the industry and just paid a dividend (D0) of $3. You expect that the growth rate of dividends will be 50% during the first year (g0,1 = 50%) and and 25% during the second year (g1,2 = 25%). What...
Click here to read the eBook: Constant Growth Stocks CONSTANT GROWTH VALUATION Holtzman Clothiers's stock currently...
Click here to read the eBook: Constant Growth Stocks CONSTANT GROWTH VALUATION Holtzman Clothiers's stock currently sells for $40 a share. It just paid a dividend of $1.5 a share (i.e., D0 = $1.5). The dividend is expected to grow at a constant rate of 3% a year. What stock price is expected 1 year from now? Round your answer to two decimal places. $ What is the required rate of return? Round your answer to two decimal places. Do...
Nonconstant Growth Stock Valuation Assume that the average firm in your company's industry is expected to...
Nonconstant Growth Stock Valuation Assume that the average firm in your company's industry is expected to grow at a constant rate of 6% and that its dividend yield is 8%. Your company is about as risky as the average firm in the industry and just paid a dividend (D0) of $1.75. You expect that the growth rate of dividends will be 50% during the first year (g0,1 = 50%) and 30% during the second year (g1,2 = 30%). After Year...